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Leonard Hyman & William Tilles

Leonard Hyman & William Tilles

Leonard S. Hyman is an economist and financial analyst specializing in the energy sector. He headed utility equity research at a major brokerage house and…

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How The Oil & Gas Industry Can Prepare For Peak Demand

  • Many analysts see oil demand peaking somewhere in the 2030s.
  • Oil producers should avoid making commitments that will pay off years from now when the market could be far weaker than at present.
  • Once demand growth grinds to a halt, only low-cost producers will be well positioned to profit.
Offshore

Not long ago we argued that as a rational business strategy, oil producers should raise prices, hold back production, restrain capital spending and make hay while the sun shines. It was a Milton Friedman-like bit of advice. Don’t worry about the world economy, the impact on poor countries, or how the policy helps the Russians to finance the Ukraine war. If it is not illegal, then do it. The long-term consequences of that strategy to the prospects and reputations of the oil producers might be bad, but if the producers have already concluded that they have limited long-term prospects and no reputational upside anyway, why worry?   With more recent numbers in as well as Saudi Arabia’s decision to cut production in mind, let’s take another look. What accounts for oil consumption? If the answer, short term, is not price, then why not raise prices? First for the facts, a look at worldwide oil consumption, world real gross domestic product (GDP), and real price of oil, all from standard sources for the years 2000-2022. 

In those years, petroleum consumption rose an average of 1.1% a year, real GDP 3.6% a year and oil prices 12.2% a year. However, on a year-to-year basis, the best explanation of the percentage change in world oil consumption is the percentage change in that year’s real gross domestic product. Adding price to the formula did not improve the analysis, at least not in the short term. The impact of price may come later, as users of oil adjust consumption, changing processes or scrapping old furnaces as they reach replacement age. Figure 1 shows the relationship between oil consumption and economic activity.

Related: Guyana To Pump 1.2 Million Barrels Of Oil Per Day By 2027

Figure 1.  Percentage change in annual worldwide oil consumption as a function of percentage change in annual worldwide economic activity : 2000-2022 (%)

Now, let’s look ahead. Back in 2000-2020, world GDP grew roughly 3.6% per year. Economic gurus, taking into account the potential decline in the working-age population as well as damage wrought by COVID and war, think that economic growth in 2020-2050 will be closer to 2-3%. With that rate of economic growth, based on previous experience, we could expect oil consumption to grow less than 1% per year.  But it looks as if the oil market could suffer a disconnection from past trends, just as it did after the Oil Embargo of the 1970s, but this time caused by electrification of vehicles. Transportation accounts for 50-60% of oil consumption.  Electrification of transportation, then, will threaten the biggest market for oil. Based on automobile company electrification timetables, we calculate that world oil consumption could peak around 2035. Assuming that other oil markets hold up, oil consumption would then decline 20% through 2050. (BP, which makes  an excruciatingly detailed analysis of energy demand every year, sets the peak oil consumption year at 2030, after which oil consumption declines 25-75% by 2050.)

So, here’s a reasonable scenario: slow growth for the coming 7-12 years, then a decline, with the question being: how fast is the decline? Consumers need the oil, and will pay for it in the meantime.But don’t live in denial about the decline, though.  Your biggest customer has handed you a timetable for its withdrawal from your market and is putting up billions of dollars to make the move. What should oil producers do? In a way, that future resembles a bubble. Everyone playing in the market knows that the good times will end, and most of those players, unfortunately for them, figure that they will be the ones to close their positions profitably before the bubble begins its slow contraction. But here’s the thing about bubbles. They may last for years but they don’t contract slowly. They burst. And the first sign of impending doom is a slowdown in market momentum. That’s when the players all decide to get out at once (and don’t succeed) and the bubble bursts. If we are right, oil producers should avoid making commitments that will pay off years from now when the market could be far weaker than at present. Don’t try to catch a falling knife. To the extent that there will be winners after 2035, they will be the lowest cost producers.  

To sum up the oil market: slow growth ahead, followed by even slower growth. The industry's most important customer, the transport sector, has turned faithless, and declared its intentions to rely on another energy source. In the meantime, though, consumers with existing vehicles need petrol and will pay what they have to to obtain it. That is the business. Not permanent, or pretty, but profitable for now. 

By Leonard Hyman and William Tilles for Oilprice.com

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  • Mike Lewicki on April 15 2023 said:
    PEAK DEMAND--WONT HAPPEN UNTIL 2050 OR 2060 OR EVER....

    DO YOU THINK POPULATION GROWTH WILL STOP?

    THERE COULD BE 11 BILLION PEOPLE ON PLANET EARTH BY 2055.

    DO YOU REALLY THINK CHILDBIRTH WILL TAPER OFF VERSUS DEATHS.

    POPULATION INCREASES REQUIRE FOSSIL FUELS. FULL STOP!

  • Mamdouh Salameh on April 16 2023 said:
    The realities in the global oil market refute these claims.

    1- There is no alternative to oil and gas throughout the 21st century and probably far beyond. It is highly unlikely that an alternative to oil as versatile and practicable as oil itself could be discovered or developed in the next 100 years.

    2- Oil demand is projected to continue growing well into the future albeit at a slightly decelerating rate resulting from penetration of the EVs into the global transport system and government legislations. However, demand growth will be underpinned by a global population projected to rise from 8.0 billion currently to 9.7 billion by 2050 and a global GDP expected to grow from $97 trillion nominal ($144 trillion PPP) currently to $245 trillion by 2050.

    3- The continued availability of oil resources will be assured by rising oil prices and technology advances enhancing oil recovery factor (R/F) from the current global average of 36% to perhaps 40%-45% possibly higher.

    4- For the last 30 years, fossil fuels have continued to account for 84% of global primary energy consumption despite billions if not trillions of dollars spent on renewable energy over the same period with not much to show for it. This means that demand is steady and strong.

    5- The notions of global energy transition and net-zero emissions are illusions. Trying to electrify the global economy including agricultural production with a global transition to renewables won’t succeed without major contributions from natural gas and to some extent nuclear power and coal. The reason is the intermittent nature of renewables. Today’s technology won’t allow us to save solar electricity generated in summer for use in winter. Renewables by themselves are incapable of operating any kind of economy.

    6- The world could be heading towards a permanent energy crisis characterized by shortages. Because leaders of the world won’t be able to solve it, they will take the easy option of blaming it on climate change and telling their peoples that by working together, we can move away from fossil fuels. This is the world’s biggest lie.

    7- EVs will never ever prevail over ICEs. The reason is that motor technology is enabling ICEs to become extremely environmentally-friendly with emissions virtually on par with those associated with the manufacturing of EV’s lithium batteries and decommissioning them at the end of their shelf life. To that could be added the other advantages like range, price and ease of fuelling with gas stations virtually available in every street corner.

    Dr Mamdouh G Salameh
    International Oil Economist
    Global Energy Expert
  • David Jones on April 18 2023 said:
    The main driver of oil demand is transport. Sales of ICE vehicles peaked in 2017. EVs sold 10m units in 2022, they will reach 40m annual sales by 2027 or 2028, and 100% of vehicle sales sometime in the 2030s. It will then take a decade or so to replace the fleet.

    How can demand for oil not fall if ICE vehicle sales are falling?

    If you doubt this then I ask you what is your prediction for global EV sales in 2023 and 2024? Both as a total number and as a percentage of light vehicles?
  • Tom Kool on April 18 2023 said:
    From the authors:

    A few comments are in order. First to Mike Lewicki. Most sources think population will hit 9.7 billion in 2050, meaning a 0.8% annual rate of growth. Population growth is really slowing. As for the death rate never exceeding (or equalling?) the birth rate, that is already the case in many European countries, Russia, China, Japan and South Korea. So if you are betting on population growth to boost oil demand, don’t expect too much.

    To Mamdouh Salameh. We are not discussing oil availability but rather demand for oil. Our projections for oil usage bake in the usual projections for GDP and population, which do not vary much from source to source. We don’t make any pretense of their econometric methodology. The problem comes, as noted by David Jones, when you make a few conservative assumptions about electric vehicle penetration. Let’s say that 10% of new vehicle sale are electric now and 20% in 10 years. If that happened, sales of petroleum plroducts to transportation would peak at the end of the decade, and the drop in usage might be enought to cause overall oil sales to fall. That’s simple arithmetic based on some extremely conservative calculations. Just do the arithmetic. Let’s top pretending that the auto manufacturers are kidding about EVs. They have crossed the Rubicon.

    Finally, our article really is about momentum, growth rates, and the value of assets
    employed in the discovery and exploitation of oil. If you want to make flagrantly risky investments, fine, that is the capitalist system. Make believe that the Greenland ice cap isn’t melting, too. Our point, in the article, was that doing so is not good business, but collecting big profits now is, because once the numbers begin to weaken noticeably, you won’t have another opportunity.

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